Municipal Securities Should Be Exempt from the Application of Proposed Rule 15Ga-2

Proposed rule 15Ga-2 requires an issuer or underwriter of any asset-backed security to make publicly available through a filing on EDGAR five business days before the first sale of the securities the findings and conclusions of any third-party due diligence report obtained by the issuer or the underwriter, based on new Section 15E(s)(4)(A) added to the Securities Exchange Act by Section 932 of Dodd-Frank. In the proposing release (Release Nos. 33-9150, 34-63091), the SEC interprets two sections of Dodd-Frank differently in proposing rules 230.193 and 15Ga-2. The SEC limits the application of the former to registered offerings, since Section 945 of Dodd-Frank speaks of a registration statement, but the SEC proposes that the latter apply to both registered and unregistered offerings of asset-backed securities, since there is no express statutory limit on the broad reach of asset-backed security in the applicable portion of Section 932 of Dodd-Frank. (Release at pages 23-24) For the reasons that follow and in response to a request for comments on this point (Release at 31), we urge the SEC to exempt all municipal securities from the application of Rule 15Ga-2 or, at a minimum, exempt municipal asset-backed securities to which the issuer has pledged its general credit or other assets.

While we concede that the definition of asset-backed security in Dodd-Frank is broad, the SEC, in interpreting Section 15E(s)(4)(A) of the Exchange Act to apply to municipal securities, has evidently concluded that Congress in enacting Dodd-Frank has implicitly repealed the Tower Amendment. The Tower Amendment, Section 15B(d)(1) of the Exchange Act, provides in part that the SEC is not authorized to require any issuer of municipal securities to file with the SEC prior to the sale of the securities by the issuer any application, report or document in connection with the issuance, sale or distribution of the securities. In proposed rule 15Ga-2, the SEC does precisely that. The basis for the SECs interpretation is the broad definition of asset-backed security and the failure of Congress in Section 932 of Dodd-Frank to refer to Section 7 of the Securities Act or registration statements filed under the Securities Act. (Release at pages 23 to 24.) But Congressional silence on this point cannot reasonably be interpreted as tantamount to repeal of the Tower Amendment, which is part of the existing legislative and regulatory structure that reflects the balancing of interests of investors and the sovereign interests of state and local government issuers. The SEC has itself recognized (and recently lamented) the legislative limits on its ability to regulate disclosure in the municipal securities market. Congressional silence in enacting Section 932 of Dodd Frank is much too slender a reed upon which to overturn this long-standing legislative and regulatory structure. Therefore, the SEC should exempt all municipal securities from the proposed rule.

Apart from the Tower Amendment and concerns for comity, applying the definition of asset-backed security in Dodd-Frank literally in the circumstances proposed to be governed by Rule 15Ga-2 makes little sense if that application includes municipal asset-backed securities to which the issuer has pledged its general credit or other assets. First, as discussed in our comment on proposed rule 15Ga-1, such municipal asset-backed securities generally should not be regarded as asset-backed securities for purposes of Dodd-Frank. That distinction has particular application in this context because ordinarily the mortgage loans to be financed by an issue of single-family mortgage revenue bonds are not identified before the bonds are sold or issued. At times, to minimize concerns about negative arbitrage (i.e., the inability to invest unexpended bond proceeds at the yield of the bonds), state or local government issuers may purchase or warehouse mortgage loans in anticipation of a bond issuance, but the pledging of existing mortgage loans at the time of issuance of the bonds in this circumstance does not relate to providing necessary security for purchasers of the bonds, but arises from the financial needs of the issuer. Thus, the situation for municipal issuers of asset-backed securities is substantially different from trusts issuing asset-backed securities, where the assets customarily must be identified at the time of sale. Consequently, the SEC should not simply assume that Congressional intent in adding Section 15E(s)(4)(A) to the Securities Exchange Act of 1934 was to subject such governmental securities to those provisions, because Congress failed to expressly refer to registered offerings.

Furthermore, proposed rule 15Fa-2 would require that disclosure of the findings and conclusions of third-party diligence reports be made on EDGAR. If the SEC believes that it has the authority to require that government issuers make such disclosure, EDGAR is obviously not the proper location to make the disclosure publicly available as required by Dodd-Frank. The central information repository for municipal securities is EMMA, operated by the MSRB, pursuant to SEC Rule 15c2-12, and that should be the repository of such disclosure if the SEC is authorized to require it and finds that it is material to investors in the asset-backed securities of governmental issuers.